Stefan Avdjiev
Michael Chui
Hyun Song Shin
[email protected]
[email protected]
[email protected]
Non-financial corporations from emerging market
economies and capital flows1
Non-financial corporations from emerging market economies (EMEs) have increased their
external borrowing significantly through the offshore issuance of debt securities. Having
obtained funds abroad, the foreign affiliate of a non-financial corporation could transfer funds
to its home country via three channels: it could lend directly to its headquarters (withincompany flows), extend credit to unrelated companies (between-company flows) or make a
cross-border deposit in a bank (corporate deposit flows). Cross-border capital flows to EMEs
associated with all three of the above channels have grown considerably over the past few
years, as balance of payments data reveal. To the extent that these flows are driven by financial
operations rather than real activities, they could give rise to financial stability concerns.
JEL classification: D21, F31, G32.
The pattern of cross-border financial intermediation has undergone far-reaching
changes in recent years, from one that relied overwhelmingly on bankintermediated finance to one that places a greater weight on direct financing
through the bond market. In the process, non-financial firms have taken on a
prominent role in cross-border financial flows. They have increased their external
borrowing significantly through the issuance of debt securities, with a significant
part of the issuance taking place offshore. Between 2009 and 2013, emerging
market non-bank private corporations issued $554 billion of international debt
securities. Nearly half of that amount ($252 billion) was issued by their offshore
affiliates (Chui et al (2014)). 2 An important question is whether this increased
corporate external borrowing can be a source of wider financial instability for
emerging market economies and, if so, which channels of financing flows give rise
to concerns.3
The large increase in issuance by their overseas affiliates shows that EME firms’
financing activities straddle national borders. Hence, measurement of external debts
1
The authors would like to thank Claudio Borio, Dietrich Domanski, Branimir Gruić, Pablo GarcíaLuna, Robert McCauley, Patrick McGuire, Christian Upper and Philip Wooldridge for their
discussions. Deimantė Kupčiūnienė provided excellent research assistance. The views expressed are
those of the authors and do not necessarily reflect those of the BIS.
2
For further evidence of increased offshore bond issuance by EME non-financial corporations, see
Gruić et al (2014b).
3
Chui et al (2014) outline the potential risks related to EME corporate balance sheets, focusing on
the role of leverage and currency mismatch.
BIS Quarterly Review, December 2014
67
based on the residence principle can be problematic.4 In particular, external debt
based on the residence principle may understate the true economic exposures of a
firm that has borrowed through its affiliates abroad. If the firm’s headquarters has
guaranteed the debt taken on by its affiliate, then the affiliate’s debt should rightly
be seen as part of the firm’s overall debt exposure. Even in the absence of an
explicit guarantee, the firm’s consolidated balance sheet will be of relevance in
understanding the firm’s actions. While this point has been well recognised in the
realm of international banking (Cecchetti et al (2010)), it had not received much
attention in the context of non-financial corporates until recently (Gruić et
al (2014a)).
The practice of using overseas affiliates as financing vehicles has a long history.
Borio et al (2014) describe how in the 1920s German industrial companies used their
Swiss and Dutch subsidiaries as financing arms of the firm to borrow in local
markets and then repatriate the funds to Germany.5 As old as such practices are,
they have become the centre of attention again in recent years due to the
increasingly common practice of EME non-financial corporates borrowing abroad
through debt securities issued by their affiliates abroad. If the proceeds of the bond
issuance are used for acquiring foreign assets, the money stays outside and there
are no cross-border capital movements. However, we will be focusing on the case
where the firm transfers the proceeds of the bond issuance back to its home
country, either to finance a local (headquarters) project, or to be held as a financial
claim on an unrelated home resident – say, by being deposited in a bank or by
being lent to another non-bank entity. If the overseas bond proceeds are
repatriated onshore to invest in domestic projects with little foreign currency
revenue, the firm will face currency risk. If the proceeds are first swapped into local
currency, then the firm’s activities are likely to have an impact on financial
conditions (Box 1). In either case, the economic risks may be underestimated if
external exposures are measured according to the conventional residence basis.
Having obtained funds abroad (by issuing bonds offshore), the foreign affiliate
of a non-financial corporation could act as a surrogate intermediary by repatriating
funds (Chung et al (2014), Shin and Zhao (2013)). It can do that via thee main
channels (Graph 1). First, it could lend directly to its headquarters (within-company
flows). Second, it could extend credit to unrelated companies (between-company
flows). Finally, it could make a cross-border deposit in a bank (corporate deposit
flows).
A practical question is how best to monitor these non-bank capital flows under
the existing measurement framework organised according to the residence principle.
The balance of payments (BoP) accounting framework lists broad categories such as
foreign direct investment (FDI) and portfolio flows, but it does not separate out the
4
In international finance, the statistical convention is to identify the border as the boundary of the
national income area, so that what is “external” or “internal” is defined by reference to that
boundary. This statistical convention gives rise to the residence principle. A firm is resident in a
particular national income area (or “economic territory”) if it conducts its business activities mostly
within the boundaries of that economic territory.
5
Even to this day, Germany is one of the few developed countries where non-financial firms are still
generating large within-company capital flows across borders. During the past five years, gross
direct investment flows to Germany totalled $185 billion, $73 billion of which were for equity
acquisitions and the rest were debt transfers between a firm’s headquarters and its affiliates.
68
BIS Quarterly Review, December 2014
Box 1
International bond issuance, cross-currency swaps and capital flows
When an EME company issues a US dollar-denominated bond in overseas capital markets and then repatriates the
proceeds, one would expect that to show up as capital inflows in US dollars. However, this need not always be the
case. The company or its overseas subsidiary can issue the bond and swap the proceeds into domestic currency
before transferring the funds back to the headquarters. Obviously, there will be a similar increase in the
headquarters’ liabilities, but only the company’s consolidated balance sheet would show an increase in foreign
currency liabilities.
For instance, Chinese firms have primarily issued US dollar-denominated bonds abroad, whereas non-Chinese
companies account for a sizeable proportion of offshore renminbi bond (CNH) issuance (Graph A). Very often, these
non-Chinese entities will swap their CNH proceeds into US dollars. In doing so, they are taking advantage of the
cross-currency swap markets to obtain US dollar funding at lower costs than by issuing US dollar bonds (HKMA
(2014)). Similarly, cross-currency swaps offer Chinese firms a channel to get around the tight liquidity conditions in
China by swapping their US dollar proceeds from bond issuance into renminbi and remitting to their headquarters.
International debt securities issuance
In billions of US dollars
Graph A
Net renminbi-denominated bond issues
Net issues of international debt by Chinese nationals
15
40
10
20
5
0
0
–5
2007
2008
2009
2010
2011
2012
2013
2014
Rest of the world
Chinese nationals
–20
2007
2008
Renminbi
US dollar
2009
2010
2011
2012
2013
2014
HK dollar
Other currencies
Source: BIS international securities statistics.
flows associated with corporate activity from those of the financial sector.6 However,
a little detective work can reveal a wealth of information. This article explores how
the BoP data and some key items buried deep within the broad categories of direct
investment and other investment can be used to shed light on cross-border capital
flows through non-financial corporate activities (Table 1).
In the rest of this article, we present evidence that capital flows to EMEs
associated with non-financial corporations have indeed increased markedly over the
6
Reporting of sectoral data, however, is included in the sixth edition of the IMF’s Balance of
Payments and International Investment Position Manual (BPM6) published in 2009 and last updated
in November 2013. The IMF will only accept data submitted under this new template from January
2015 (Box 2). However, only a small number of EMEs are expected to submit granular sectoral data
in the near term.
BIS Quarterly Review, December 2014
69
Non-financial corporations and capital flows
Graph 1
Source: BIS.
past few years through three different channels. First, we demonstrate that transfers
between firms’ headquarters and their offshore affiliates have surged. Next, we
show that “non-bank” trade credit flows to EMEs have increased significantly.
Finally, we demonstrate that the amount of external loan and deposit financing to
EMEs provided by non-banks has grown considerably.
Within-company credit
An accounting convention in the balance of payments deems borrowing and
lending between affiliated entities of the same non-financial corporate to be “direct
investment”. Specifically, such transactions are classified under the “debt
instruments” sub-item of direct investment. In contrast, borrowing and lending
between unrelated parties are classified as either a portfolio investment or under
the “other” category.7 The rationale behind treating within-firm transactions as
direct investment is that the overall profitability of a multinational corporation
depends on advantages gained by deploying available resources efficiently to each
unit in the group. For example, tax considerations could drive the choice between
equity and within-company debt, and behaviourally such debt can be, and often is,
written down in adverse circumstances.
Classifying the transfer onshore of funds obtained offshore as FDI raises
questions about the traditional view that FDI is a stable or “good” form of capital
flow (CGFS (2009)). This may be true for FDI in the form of large equity stakes
associated with greenfield investment or foreign acquisitions. But within-company
loans, especially if invested in the domestic financial sector, could turn out to be
“hot money”, which can be withdrawn at short notice. Thus, to the extent that
7
70
Lending and borrowing between affiliated deposit-taking corporations (ie intrabank flows) are an
exception to the above rule. They are classified not as FDI (debt), but as “other investment” (loans
and deposits, respectively).
BIS Quarterly Review, December 2014
Balance of payments financial accounts1
Table 1
Gross inflows
Direct investment
Equity
Debt instruments (within-company credit)
Portfolio investment
Equity
Debt
Financial derivatives
Other investments
Currency and deposits (corporate deposits)
Loans (between-company credit)
Trade credit (between-company credit)
Other payables (between-company credit)
1
Possible modes of capital flow generated by non-financial companies are in bold.
Source: IMF, Balance of Payments Manual.
within-company loans are financed through the offshore issuance of debt securities,
they could be viewed as portfolio flows masked as FDI.
Quantitatively, for most EMEs, within-company lending has been modest when
compared with purchases of stakes in other companies (Graph 2, left-hand panel).
However, there have been sizeable increases in within-company flows in Brazil,
China and Russia, amounting to more than $20 billion per quarter for these three
countries combined (Graph 2, right-hand panel), which was broadly similar to the
size of total portfolio inflows to the three countries during this period.
Between-company trade credit
The second mode of capital flow generated by non-financial firms’ activities is
through trade credit. The term “trade credit” has a narrower meaning in the balance
of payments than in everyday use. Instead of encompassing trade financing more
broadly such as guarantees through banks and letters of credit, the trade credit
category under the BoP accounts refers only to claims or liabilities arising from the
direct extension of credit by suppliers for transactions in goods and services, under
a residual item known as “other investment”. Bank-provided trade financing, such as
letters of credit, is recorded separately under “loans”.8
Typically, trade credit flows between companies are small and account for a
small proportion of total other investment flows in most instances. Direct credit
extension between exporters and importers could be seen as much riskier than
arranging trade financing through banks. However, trade credit flows to EMEs have
increased since the global financial crisis (Graph 3, left-hand panel), and the increase
8
Other firm-to-firm cross-border transactions such as account payables/receivables are simply
recorded under “other” in “other investment”.
BIS Quarterly Review, December 2014
71
FDI: equity and debt flows to major EMEs
In billions of US dollars
Graph 2
Gross FDI flows to major EMEs1
Gross within-company flows to selected EMEs
100
30
80
20
60
10
40
0
20
0
2005
2006
2007
Equity shares
2008
2009
2010
2011
Debt instruments
2012
2013
–10
2005
2006
2007
Brazil
2008
Russia
2009
2010
2011
2012
2013
2
China
1
Brazil, Chile, the Czech Republic, Hungary, India, Indonesia, Korea, Mexico, the Philippines, Poland, Russia, South Africa, Thailand and
Venezuela. 2 Data for China start from 2010.
Source: IMF.
was driven, to a certain extent, by China (Graph 3, right-hand panel). In fact, the
share of trade credit inflows in total other investment in China in recent years has
been much larger than that in other EMEs. While these trade credit flows to China
may reflect Chinese companies’ growing importance and credibility in world trade,
trade credit could be another route through which the proceeds of offshore funding
can be transferred to headquarters and/or unrelated companies onshore.
Between-company loans and corporate deposits
Despite the limitations of the existing data frameworks discussed above, it is
possible to combine BoP statistics with the BIS international banking statistics (IBS)
to shed some light on the growing importance of non-bank corporates in providing
cross-border loans and deposits to EMEs.
From the lender perspective, the IBS capture the cross-border positions of
internationally active banks. As a consequence, the IBS could be used to measure
the amount of cross-border loans that banks provide to residents (both banks and
non-banks) of a given country.
From the borrower perspective, a couple of (liability) categories in the BoP data
provide information on the amount of cross-border financing that the residents of a
given country obtain in the form of deposits and loans. More specifically, “deposit
liabilities” capture the standard contract liabilities of all deposit-taking institutions in
a given reporting jurisdiction to both banks (interbank positions) and non-banks
(transferable accounts and deposits). Meanwhile, “loan liabilities” cover liabilities
that are created when a creditor lends funds directly to a debtor, and are
documented by claims that are not negotiable.
72
BIS Quarterly Review, December 2014
Between-company flows to EMEs
Inflows of trade credit and other account payables, in billions of US dollars
Flows to all major EMEs1
Flows to China
40
40
20
20
0
0
–20
–20
–40
–40
–60
–60
–80
2005
2006
2007
2008
Graph 3
2009
2010
2011
2012
2013
Trade credit
–80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Other
1
Includes Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Hungary, India, Indonesia, Korea, Peru, the Philippines, Poland,
Russia, South Africa, Thailand, Turkey and Venezuela; Malaysia and Mexico are excluded due to data availability.
Sources: IMF; State Administration of Foreign Exchange, China.
Table 2 illustrates how BoP and IBS can be brought together to estimate the
amount of non-bank finance to EME residents.9 The two BoP categories discussed
above capture the cross-border liabilities of (bank and non-bank) residents of a
given country to all (bank and non-bank) creditors (represented by cells A, B, C and
D).10 By contrast, the IBS capture solely the cross-border liabilities to offshore banks
(cells A and B).11 Thus, in principle, the difference between the two series could be
used as a rough proxy for the amount of non-bank external financing to the
residents of a country (cells C and D).12
This difference used to be small but has been increasing rapidly in recent years
(Graph 4, left-hand panel).13 Up until 2007, the two series moved fairly in sync,
suggesting that BoP deposits and loan flows were dominated by banks. However,
the gap between the two series has been steadily growing and currently stands at
approximately $270 billion (which amounts to 17% of cumulative BoP flows since
Q1 2005). The growing gap between the BoP and IBS series could be interpreted as
evidence of the increasing weight of non-banks in providing external loan and
deposit financing to residents of emerging market economies.
9
Using a slightly different approach, Domanski et al (2011) decompose total (domestic and crossborder) credit to a number of advanced economies by creditor sector (bank and non-bank).
10
In the context of our discussion, the category “non-banks” includes both non-financial firms and
non-bank financial firms. That said, in the case of EMEs, a large part of the latter group is accounted
for by the non-bank financial vehicles of non-financial corporates.
11
Note that intrabank flows are included in both the IBS series on cross-border bank lending and the
BoP series on external deposit liabilities (see footnote 7 for additional details).
12
In theory, the variation between the BIS and the BoP data could also be due to residents’ crossborder liabilities to banks located in countries which do not report data for the IBS. In practice,
given the fairly comprehensive coverage of the IBS (which captures approximately $30 trillion worth
of cross-border claims that belong to banks located in 44 jurisdictions), it is reasonable to assume
that the above accounts for a negligible part of the overall wedge between the two series.
13
The data used to construct the IBS series are available in BIS Statistical Table 7A.
BIS Quarterly Review, December 2014
73
Coverage of external loans and deposits in the BoP and IBS data
Table 2
Borrowing country
Banks
Non-banks
Banks
A
B
Non-banks
C
D
Lending country
Captured by both BoP and IBS data.
Captured solely by BoP data.
Sources: IMF, Balance of Payments Manual; BIS, Guidelines for reporting the BIS international banking statistics.
A more detailed examination of the data suggests that the role of non-banks
might be even greater than the above estimates imply. Assuming positive gross
inflows from non-banks, the BoP external loan and deposit estimates should exceed
the respective IBS estimates for each country in our sample (since, as discussed
above, the former include external lending by non-banks, whereas the latter do
not). However, we find that the exact opposite is true for several EMEs, such as
Brazil, China, Indonesia, the Philippines and Thailand (Graph 4, centre panel).14 In
theory, this finding could be explained by negative cumulative non-bank flows to
each of those countries. In practice, it is highly unlikely that this was the case during
Cumulative cross-border deposit and loan gross flows to major EMEs1
By creditor sector, in billions of US dollars
Full sample2
Subsample A3
05 06 07 08 09 10 11 12 13
All external creditors
Graph 4
5
Subsample B4
1,400
800
1,000
1,050
600
750
700
400
500
350
200
250
0
0
0
05 06 07 08 09 10 11 12 13
Banks located abroad
05 06 07 08 09 10 11 12 13
6
1
Cumulative flows starting from Q1 2005. Data for China start from Q1 2010. 2 Full sample = subsample A + subsample B. 3 Brazil,
China, Indonesia, the Philippines and Thailand. 4 Chile, the Czech Republic, Hungary, India, Korea, Mexico, Poland, Russia, South Africa
and Turkey. 5 Sum of “BoP other liabilities: currency and deposits” and “BoP other liabilities: loans” for each listed country. 6 Crossborder claims of BIS reporting banks on each listed country.
Sources: IMF; BIS locational banking statistics by residence (Table 7A).
14
74
McCauley and Seth (1992) and Borio et al (2013) find that, for the United States, figures from the
IBS data on external bank loans considerably exceed those based on the respective flow of funds
data.
BIS Quarterly Review, December 2014
Box 2
Interpreting FDI flows under the new balance of payments template
The rapid pace of financial globalisation over the past few decades has changed many aspects of international
capital flows. To improve the understanding of these capital movements, in 2009 the IMF and its members agreed
on a new template for collecting international financial transactions data: the sixth edition of the IMF’s Balance of
Payments and International Investment Position Manual (BPM6). From January 2015, the IMF will only accept data
submissions under BPM6. In the transition period, some countries will still be publishing their BoP data under the
previous template (BPM5, introduced in 1993) and the IMF will simply convert those “old” data to the new standard.
Using Brazil as an example, this box illustrates how the conversion between BPM5 and BPM6 affects the
interpretation of FDI flows.
Data published under the two formats reflect somewhat different treatments of within-company loans,
resulting in differences in reported gross FDI inflows and outflows (Graph B, left-hand and centre panels), even
though net FDI flows remain unchanged. This is because, under BPM5, FDI transactions between affiliates are
recorded on a residence versus non-residence basis, whereas BPM6 differentiates between the net acquisition of
assets and the net incurrence of liabilities. Simply put, under BPM5, both headquarter lending to affiliates (which
increases claims) and borrowing from affiliates (which increases liabilities) are counted as gross outflows, albeit with
opposite signs. Under BPM6, by contrast, the two activities will fall into different categories. While headquarter
lending to affiliates will continue to count as capital outflow, borrowing from affiliates will be counted as net
incurrence of liabilities (capital inflow). Using the notation in Graph B (right-hand panel), net acquisition of debt
claims under BPM6 (item 6.1.2) will be the sum of items 5.1.2 and 5.2.2 under BPM5.
Brazilian FDI flows
Graph B
Gross FDI inflows
Gross FDI outflows
In billions of US dollars
Direct investment flows
In billions of US dollars
30
10
25
5
20
0
15
–5
10
–10
5
0
08
09
10
11
12
13
14
–15
08
BPM5
09
10
11
12
13
14
BPM 5
BPM 6
Gross outflows
5.1 Direct investment
6.1 Net acquisition of
abroad
assets
5.1.1 Equity
6.1.1 Equity claims
5.1.2 Claims on affiliates
6.1.2 Debt claims
5.1.3 Liabilities to affiliates
Gross inflows
5.2 Direct investment
6.2 Net incurrence of
in reporting country
liabilities
5.2.1 Equity
6.2.1 Equity liabilities
5.2.2 Claims on direct
6.2.2 Debt liabilities
investors
5.2.3 Liabilities to direct
investors
BPM6
Sources: Central Bank of Brazil; IMF; BIS calculations.
the time period we examine. A much more plausible explanation could be related to
inconsistencies in the reporting of external liabilities.15
While the above finding is intriguing in its own right, it also has important
implications for the main question that we examine in this article. Namely, it
suggests that, for the remaining EMEs in our sample, the aggregate size of the gap
between the BoP and IBS series is considerably larger than the one implied by the
15
Potential data reporting-related sources of discrepancy include the coverage of the reporting
population, the treatment of bank-supported trade credit and the exchange rate valuation
adjustment methodology.
BIS Quarterly Review, December 2014
75
estimates for the full sample. Indeed, as the right-hand panel of Graph 4 illustrates,
the wedge between the BoP and IBS series is considerably larger for the latter set of
EMEs (ie Chile, the Czech Republic, Hungary, India, Korea, Mexico, Poland, Russia,
South Africa and Turkey). At the end of 2013, the BoP-implied external loan and
deposit series for that group of countries exceeded its IBS counterpart by over
$550 billion (51% of cumulative BoP flows since Q1 2005). This presents further
evidence of the importance of non-banks in providing external loan and deposit
financing to EMEs.
Conclusion
The shift away from bank-intermediated financing to market financing over the past
few years has coincided with a sharp increase in international bond issuance by EME
non-financial corporations. This trend could have important financial stability
implications. Yet, analysis of it is hindered by conceptual difficulties associated with
statistical conventions on the measurement of cross-border flows.
In this article, we utilise several key BoP data items to shed light on crossborder capital flows through non-financial corporate activities. We find that capital
flows associated with non-financial corporations have indeed increased markedly
over the past few years through three different channels. First, within-firm transfers
have surged. Second, trade credit flows to EMEs have increased significantly. Finally,
the amount of external loan and deposit financing to EMEs provided by non-banks
has grown considerably. We interpret those findings as evidence that the offshore
subsidiaries of EME non-financial corporates are increasingly acting as surrogate
intermediaries, obtaining funds from global investors through bond issuance and
repatriating the proceeds to their home country through the above three channels.
76
BIS Quarterly Review, December 2014
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